*2155 1. The petitioner held to be affiliated with each other and with certain other corporations for 1922 and 1923.
2. Two of the petitioner corporations paid commissions to real estate brokers for securing tenants for apartments in buildings owned by them in 1922, 1923, and 1924, charged the amounts to expense, and deducted the same from gross income in their income-tax returns. The rental commissions thus paid were disallowed as deductions by the Commissioner who held that they constituted the cost of capital assets and should be charged off over the life of the assets. The petitioners kept their books of account and made their income-tax returns upon a mixed "actual and accrual" basis. Held, that the accrual basis used by the Commissioner with respect to rental commissions paid was correct. Bonwit Teller & Co.,17 B.T.A. 1019">17 B.T.A. 1019; Central Bank Block Association,19 B.T.A. 1183">19 B.T.A. 1183.
*289 These proceedings, consolidated for hearing*2156 and opinion, are for the redetermination of deficiencies in income tax as follows:
| Deficiencies | |||
| 1922 | 1923 | 1924 | |
| 550 Park Avenue Corporation | $11,432.36 | $201.37 | $294.73 |
| 920 Holding Corporation | 2,041.35 | 1,030.09 | 1,029.62 |
| 1148 Fifth Avenue Corporation | 592.13 | ||
| 907 Fifth Avenue, Inc | 2,570.54 | 340.19 | 187.45 |
Certain errors alleged in the petitions filed were waived at the hearing. The petitioners abandonded their claim with respect to affiliation for the calendar year 1924. Errors alleged in the petitions and not waived are (1) the denial by the Commissioner that the petitioners were affiliated with each other and with certain other corporations for the years 1922 and 1923; (2) the denial that the petitioners filed a consolidated return for 1922 and were therefore obligated to file a consolidated return for 1923; and (3) the denial of the deduction from gross incomes of 1922, 1923, and 1924 of certain amounts paid as commissions to rental agents in securing tenants for apartment houses owned by two of the petitioners.
FINDINGS OF FACT.
The petitioners, together with the other corporations listed below, were all organized under the laws*2157 of the State of New York upon the date set opposite their respective names:
| 960 Park Avenue Co., Inc | April, 1913 |
| 907 Fifth Avenue, Inc | July, 1915 |
| M.S.C. Holding Corporation | August, 1915 |
| C.C. Corporation | May, 1916 |
| 550 Park Avenue Corporation | May, 1916 |
| K.T.B. Realty Corporation | May, 1917 |
| 950 Park Avenue Corporation | May, 1918 |
| Carthos Corporation | March, 1922 |
| 1143 Fifth Avenue Corporation | May, 1922 |
| 1148 Fifth Avenue Corporation | May, 1922 |
| 920 Holding Corporation | December, 1922 |
With the exceptions of K.T.B. Realty Corporation, 1143 Fifth Avenue Corporation, and Carthos Corporation, all these corporations were organized for the purpose of operating in New York City apartment houses of a distinctive type designed by one J.E.R. Carpenter, an architect and builder of that city. The K.T.B. Realty Corporation at one time operated flats and small residences. The *290 1143 Fifth Avenue Corporation owned a small building at that address which was purchased by the Carpenter interests to protect the light for the building at 1148 Fifth Avenue, owned by the corporation of that name. The Carthos Corporation owned and operated a walk-up apartment house at*2158 190th Street and Morris Avenue, which had been designed by another architect. All of the other buildings operated by these corporations were designed and supervised by J. E. R. Carpenter.
J. E. R. Carpenter was a pioneer in designing apartment houses with a gallery and entrance hall large enough for decorative purposes. The first apartment of this type to be built by him was that at 960 Park Avenue and it was owned and operated by the corporation of that name. As Carpenter extended his activities other buildings were undertaken and, following the procedure usual in such cases, each building was incorporated separately so that the failure of one would not affect the success of the others. Each venture was conceived and planned by J. E. R. Carpenter. He was the moving spirit in each enterprise and had the deciding voice in all matters relating to the selection of the site, the type of building to be erected, and the methods by which the same should be financed. He also managed and controlled the buildings after they were completed.
In the early stages of the business Carpenter desired funds with which to carry on his projects and he approached a small group of persons with*2159 whom he had the closest connections and invited them to invest. This group consisted of his brother, J. H. Carpenter, his brother-in-law, Ernest M. Stires, and his brother's partner and close personal friend, Francis R. Mayer. All of these persons turned their money over to J. E. R. Carpenter with the understanding that he was to invest in some building enterprise which he was to control and manage. None of these individuals at the time was in the real estate business or had any detailed knowledge of that business. None of them specified the corporation or corporations in which his investment was to be placed, but they entrusted the money to Carpenter, feeling that he would use it to the best interests of the investors. Each of them had full confidence in Carpenter and made his investment as a result of that confidence. J. E. R. Carpenter took some stock, some of which he gave to his wife, Marion S. Carpenter. The latter knew nothing about the real estate business and practically nothing about her stockholdings nor even whether the stock from which she received dividends belonged to her or merely stood in her name.
The percentages of stockholdings of nine of the corporations*2160 during the years 1922 and 1923 which claim to have been affiliated in 1922 and 1923 are shown by the following table:
| 550 Park Ave. | 920 Holding | 1148 Fifth Ave. | |
| Corporation | Corporation | Corporation | |
| Per cent | Per cent | Per cent | |
| J. E. R. Carpenter | 0.04 | 100.00 | 49.00 |
| J. H. Carpenter | 99.92 | 50.00 | |
| Marion S. Carpenter | |||
| Ernest M. Stires | |||
| Francis R. Mayer | |||
| M. S. C. Holding Corporation | |||
| B. Capps | .04 | 1.00 | |
| A. Creekmore | |||
| R. B. Knowles | |||
| Mabel Knowles | |||
| Lawyers Realty Co | |||
| Vanderbilt & Burden | |||
| Geo. Kennedy-Wells Bros | |||
| Storm & Co | |||
| C. C. Corporation | |||
| Mary Carpenter | |||
| Rebecca Carpenter Millice | |||
| Virginia C. Tompkins | |||
| 100.00 | 100.00 | 100.00 |
| 907 Fifth Ave. | K. T. B. Realty | |
| Corporation | Corporation | |
| Per cent | Per cent | |
| J. E. R. Carpenter | 0.02 | 1.67 |
| J. H. Carpenter | ||
| Marion S. Carpenter | ||
| Ernest M. Stires | ||
| Francis R. Mayer | ||
| M. S. C. Holding Corporation | 79.86 | |
| B. Capps | .02 | 1.67 |
| A. Creekmore | ||
| R. B. Knowles | 5.00 | 1.66 |
| Mabel Knowles | .50 | |
| Lawyers Realty Co | ||
| Vanderbilt & Burden | 5.00 | |
| Geo. Kennedy-Wells Bros | 9.50 | |
| Storm & Co | .10 | |
| C. C. Corporation | 95.00 | |
| Mary Carpenter | ||
| Rebecca Carpenter Millice | ||
| Virginia C. Tompkins | ||
| 100.00 | 100.00 |
| C. C. Corporation | |||
| 950 Park Ave. | |||
| Until | After | Corporation | |
| Mar. 28, | Mar. 28, | ||
| 1923 | 1923 | ||
| Per cent | Per cent | Per cent | |
| J. E. R. Carpenter | 23.45 | 15.95 | 56.66 |
| J. H. Carpenter | 25.00 | 25.00 | 16.67 |
| Marion S. Carpenter | |||
| Ernest M. Stires | 25.00 | 25.00 | 16.67 |
| Francis R. Mayer | |||
| M. S. C. Holding Corporation | 25.00 | 25.00 | 10.00 |
| B. Capps | .05 | .05 | |
| A. Creekmore | 1.50 | 1.50 | |
| R. B. Knowles | |||
| Mabel Knowles | |||
| Lawyers Realty Co | |||
| Vanderbilt & Burden | |||
| Geo. Kennedy-Wells Bros | |||
| Storm & Co | |||
| C. C. Corporation | |||
| Mary Carpenter | 2.50 | ||
| Rebecca Carpenter Millice | 2.50 | ||
| Virginia C. Tompkins | 2.50 | ||
| 100.00 | 100.00 | 100.00 |
| M. S. C. | |||
| 1143 Fifth Ave. | 960 Park | Holding | |
| Corporation | Ave., Inc. | Corporation | |
| Per cent | Per cent | Per cent | |
| J. E. R. Carpenter | 98.00 | 10.00 | 0.05 |
| J. H. Carpenter | 25.00 | ||
| Marion S. Carpenter | 53.746 | 24.90 | |
| Ernest M. Stires | 46.154 | 25.00 | |
| Francis R. Mayer | 25.00 | ||
| M. S. C. Holding Corporation | |||
| B. Capps | 1.00 | .05 | |
| A. Creekmore | |||
| R. B. Knowles | 1.00 | ||
| Mabel Knowles | |||
| Lawyers Realty Co | |||
| Vanderbilt & Burden | |||
| Geo. Kennedy-Wells Bros | |||
| Storm & Co | |||
| C. C. Corporation | |||
| Mary Carpenter | |||
| Rebecca Carpenter Millice | |||
| Virginia C. Tompkins | |||
| 100.00 | 100.00 | 100.00 |
*2162 *291 All of the capital stock of the 920 Holding Corporation was owned by J. E. R. Carpenter and all of the stock of the Carthos Corporation by the M. S. C. Holding Corporation.
The stockholders of record, other than the holders of qualifying shares, were the absolute legal and equitable owners of their shares and the stock was held not subject to any agreement with respect to the incidence of ownership.
Of the stockholders, B. Capps was employed in the office of J. E. R. Carpenter to take charge of the books and other affairs of the different corporations and his salary was paid partly by Carpenter and partly by the different corporations. A. Creekmore was employed by Carpenter as the general superintendent of all of the buildings. His salary was paid partly by Carpenter and partly by the 950 Park Avenue *292 Corporation, for which he acted also as building superintendent. R. B. Knowles is an attorney in New York City, who has acted as attorney for Carpenter and the various corporations with which he has been identified since 1912 and 1913. Mabel Knowles was the wife of R. B. Knowles. Vanderbilt and Burden had an interest in the land on which the building*2163 at 907 Fifth Avenue was erected and they received stock in part payment for the land sold to the corporation. Storm & Co. were lumber dealers who supplied lumber for most of the buildings, and especially for 907 Fifth Avenue. George Kennedy was the nominee of the Chicago bank which held the stock of Wells Brothers as a pledge. Wells Brothers were the contractors for the building at 907 Fifth Avenue, and received the stock in part payment for services and materials. Mary Carpenter, Rebecca Carpenter Millice, and Virginia C. Tompkins are sisters of J. E. R. Carpenter.
Neither the members of the Carpenter group nor any of the stockholders or directors (with the exception of J. E. R. Carpenter), took any part in the management of any of the corporations. They left the entire management to J. E. R. Carpenter. Francis R. Mayer, J. H. Carpenter, and Marion S. Carpenter attended neither stockholders' nor directors' meetings. Ernest M. Stires had attended some meetings a great many years ago, prior to 1918, but could not remember the names of the corporations of which he was an officer or director. No directors' or stockholders' meetings were ever held in any of the corporations. *2164 During the years 1922 and 1923, although the minute books show what purport to be numerous meetings of the directors or stockholders, not a single one of the meetings so recorded was ever held.
The way the corporations functioned was as follows:
J. E. R. Carpenter would take some action which he deemed wise and later, sometimes on the same day and sometimes not until long afterwards, he would inform Capps or Capps would learn of what he had done. Capps or Knowles (Carpenter's attorney), would then prepare minutes of the purported meeting of the directors or stockholders, as the case might be, reciting the presence of the necessary parties and the adoption of appropriate resolutions authorizing the action which Carpenter had already taken, and such minutes would be sent to the proper parties for signature. The minutes were always signed as a matter of course, and no stockholder or director ever demanded that a meeting be held. This procedure was authorized by the by-laws of each of the corporations. There was no real corporate action taken by any of the companies as that term is commonly understood. Such action as was taken was taken by J. E. R. Carpenter upon his own initiative*2165 without consulting either the officers or directors.
*293 Business of the various corporations was carried on as a single enterprise by J. E. R. Carpenter at his office at 57th Street and Madison Avenue, New York City. No rent was charged the corporations for the use of this office and no charge was made for management or other expenses in connection therewith, except a charge of 3 per cent of the amount of rentals collected. Carpenter, through his employees, collected the rents, superintended the buildings, purchased coal and other supplies, kept the books, and paid salaries and other bills presented. Each corporation had a separate bank account, but in addition Carpenter maintained a central operating account from which bills and other payments were made for the corporations.
From time to time the corporations made loans to each other. In particular, during construction periods, when the building corporation was not able to draw on its building loans as rapidly as was needed, another corporation which happened to be in funds would make advances. Interest was not always charged on these loans, but where it was charged no attempt was made to collect it periodically*2166 and it was paid for the whole period when the loan was paid. J. E. R. Carpenter and his brother, J. H. Carpenter, sometimes guaranteed the loans made by some of the corporations from an outside source.
For the year 1922, a tentative return was filed as permitted by the rulings of the Commissioner and later a final return in the name of "M. S. C. Holding Corporation and Affiliated Corporations." The final return did not designate the names of the corporations whose operations were reported therein. The return did, however, cover the operations of 950 Park Avenue Corporation, 907 Fifth Avenue Corporation, and C.C. Corporation. The tentative return lists:
M. S. C. Holding Corporation960 Park Avenue Corporation
907 Fifth Avenue Corporation
C.C. Corporation
550 Park Avenue Corporation
115 Corporation
950 Park Avenue Corporation
K. T. B. Realty CorporationFor 1923 separate returns were filed for each of these corporations, although none of them had received permission to file a separate return. In the determination of the deficiencies herein involved the Commissioner disallowed the claim of the petitioners that they were affiliated with other corporations and determined*2167 the deficiencies involved herein upon the basis of separate returns for each corporation.
*294 The 920 Holding Corporation paid during the year 1922 commissions to real estate brokers for securing tenants in its building in the sum of $17,699.74. The commissions paid were at the rate of 1 1/2 per cent of the aggregate rentals to be paid by the tenant over the term of the lease executed by him. Such commissions were payable by the lessor upon the execution of the lease by the tenant and acceptance of the lease by the lessor. Commissions paid were not subject to refund, even though the lessee should breach the lease before the expiration of the term. The leases upon which commissions were paid by the 920 Holding Corporation in 1922 ran for periods from slightly less than three years to slightly more than five years. Likewise, the 1148 Fifth Avenue Corporation paid rental commissions in 1923 of $10,949.49 and in 1924 of $5,622.07. In its income-tax return for 1922 the 920 Holding Corporation deducted as an expense for that year the rental commissions paid and likewise the 1148 Fifth Avenue Corporation deducted rental commissions paid in the amount of $10,505.05 for 1923, *2168 and $1,836.74 for 1924. These amounts were disallowed by the Commissioner in the determination of the deficiencies herein involved upon the ground that they were not proper deductions for the years in which paid, but that they represented the cost of capital items which should be charged off over the life of the leases for the securing of which the commissions were paid.
The petitioners' books of account for 1922 and 1923 were kept upon the following basis:
Rentals were billed to tenants and credited to rental accounts. In their income-tax returns rentals were accounted for upon the basis of cash received. Interest on mortgages payable was accrued upon the books of account and so reported. Commissions were accounted for upon the basis of actual payment. The cost of insurance was reported on the accrual basis. Although the method of bookkeeping and reporting by the petitioners has been investigated a number of times by agents of the Commissioner, returns have been accepted upon the basis upon which made, except that rental commissions have not been allowed as deductions in the year in which paid, but have been allocated to the tax years covered by the leases upon which the*2169 commissions have been paid. The basis of reporting stated on the returns is "Actual and Accrued."
OPINION.
SMITH: The petitioners claim to be affiliated for the years 1922 and 1923. In their petitions they also claim to be affiliated for 1924, but at the hearing of these proceedings that claim was waived. Whether they were affiliated or not, they are not permitted to have *295 their tax liabilities determined upon the basis of consolidated returns unless the group actually filed a consolidated return for 1922. If a consolidated return was filed for 1922, and if the petitioners were affiliated, a consolidated return was required for 1923, the petitioners not having received permission to change the basis for the filing of the return for that year over that used for 1922.
There can be no question but that a consolidated return was filed for 1922. At least a part of the corporations which claimed to have been affiliated for 1922 joined in such consolidated return. Since a part of them joined in that return, all of them which were affiliated should have joined in the return. *2170 . Since the petitioners made an attempt to file a consolidated return for 1922, and since no permission was granted by the Commissioner for a change of basis for filing returns for 1923, the petitioners were obligated to file a consolidated return for 1923, providing they were affiliated for that year. ; ; ; .
Section 240 of the Revenue Act of 1921 provides in part:
(a) That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission*2171 to change the basis is granted by the Commissioner.
* * *
(c) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.
The question as to whether seven of the corporations which claimed to be affiliated for the years 1922 and 1923 were affiliated for the years 1918, 1919, and 1920 was before us in , and we held that the following corporations were affiliated:
960 Park Avenue Co., Inc.
630 Park Avenue Co., Inc.
907 Fifth Avenue Co., Inc.
M. S. C. Holding CorporationC.C. Corporation
550 Park Avenue Corporation
K. T. B. Realty Corporation*296 In our opinion we stated:
It is apparent from the findings of fact that J. E. R. Carpenter, his relatives and Francis R. Mayer constituted the same interests. Each of the five individuals, J. E. R. Carpenter; Mrs. M. S. Carpenter, *2172 his wife; E. M. Stires, his brother-in-law; J. H. Carpenter, his brother; and Francis R. Mayer, his brother's business partner and his own personal friend, did not hold the same amount of stock or even any stock in all of the eight corporations, but we are convinced that under the facts in this case that was not necessary.
The facts with respect to the affiliation status of these corporations in 1922 and 1923 are not materially different from those obtaining for the years 1918, 1919, and 1920. Since 1920, four other corporations have come into the group of corporations dominated by J. E. R. Carpenter, namely, the Carthos Corporation, 1143 Fifth Avenue Corporation, 1148 Fifth Avenue Corporation, and 920 Holding Corporation. The provisions of the Revenue Act of 1921, so far as pertinent here and relating to the affiliation of corporations, are not materially different from those of the Revenue Act of 1918. It is apparent, therefore, that if we are to hold that this group of corporations is not affiliated for 1922 and 1923, we must of necessity overrule our opinion in *2173 . We see no reason for so doing. The key to the problem involved is the answer to what constitutes the "same interests" within the meaning of section 240(c) of the taxing statute quoted above. We stated in :
* * * When Congress said "controlled by the same interests," we believe it meant something broader than persons or individuals. If "the same interests" was intended to mean only "the same persons," it would have been easy for Congress, by using the latter term, to have avoided all ambiguity. When two persons are guided in their action by a common interest (in the objective sense), they frequently constitute a single interest (in the subjective sense). * * *
In the group of corporations herein involved there were no hostile interests. All of the corporations were under the management and domination of J. E. R. Carpenter. The five individuals, J. E. R. Carpenter; his wife; J. H. Carpenter; his brother-in-law, E. M. Stires; and Francis R. Mayer, had a common interest; that is, the success of all of the corporations with which J. E. R. Carpenter was connected depended upon his efforts. *2174 There was no hostile outside interest. The mere fact that certain of these individuals owned no stock in some of the corporations and owned stock in different proportions in other corporations is not, we think, a sufficient ground for denying that they were the same interests within the meaning of the statute. In the case of , the facts were that Adolph Hirsch had a 60 per cent interest in the firm of Adolph Hirsch & Co. and his brother a 40 per cent interest. They then incorporated in 1919 as Adolph *297 Hirsch & Co., Inc. Fifteen per cent of the stock was transferred to their nephew. Adolph Hirsch owned 43.47 per cent and his brother owned 13.21 per cent of the stock of the Brazilian corporation. In the course of its opinion the court stated:
The Hirsch brothers owned together 94.85 per cent. of the shares of stock of the respondent and 55.63 per cent. of the Brazilian Company. We may regard the Hirsch brothers as of the same "interest." * * *
Although the stock of the petitioner corporations and their affiliates was owned in widely different proportions by the members of the Carpenter group, *2175 we are, nevertheless, of the opinion that they constituted the same interests within the meaning of the taxing statute, and since they controlled substantially all of the stock of the corporations, we are of the opinion that in the circumstances of these proceedings the corporations were affiliated in 1922 and 1923 for income-tax purposes.
The final question presented is whether two of the petitioners, the 920 Holding Corporation and the 950 Park Avenue Corporation, are entitled to deduct from gross income for the year in which paid certain commissions to real estate brokers for securing tenants. The amounts paid were included as a part of the operating expenses of the year in which paid both upon the petitioners' books of account and in the income-tax returns filed. The Commissioner has disallowed the deductions, it being his contention that the amounts expended in obtaining leases should be charged off by the corporations paying the commissions over the periods covered by the leases. This he has done in the determination of the deficiencies involved herein, and the parties have stipulated that if as a matter of law the petitioners are not entitled to the deduction of the commissions*2176 in the year in which paid, the allocation of the amount to the different years by the respondent is correct.
In our findings we have stated the basis upon which the petitioners' books of account and the returns were made. They were neither made upon a cash receipts and disbursements basis nor upon an accrual basis. Section 212(b) of the Revenue Act of 1921 provides:
The net income shall be computed upon the basis of the taxpayer's annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if * * * the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * *
We must assume, from the fact that the Commissioner did not accept the method of accounting employed by the taxpayer, that he was of the opinion that the books of account and the returns filed in accordance therewith did not correctly reflect net income. We have *298 also held in *2177 , and , that commissions paid to real estate agents in obtaining leases are not ordinary and necessary operating expenses to be deducted in their entirety from gross income for the year in which paid, but that they should be treated as a capital item and charged off over the period of the leases. Those decisions of the Board are controlling here. The action of the Commissioner upon this point is sustained.
Judgment will be entered under Rule 50.